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ANALYSIS: Surging gas production receipts on NGTL pipeline system might weaken AECO

Highlights

Capacity constraints could cause producer shut ins

West Canada production up 400 MMcf/d

Surging Western Canadian production poses a risk to create congestion on the NGTL pipeline system, which could lead to weaker AECO prices than the market expected.

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Production in Western Canada has been exceptionally strong in June, averaging 12.1 Bcf/d June 5-18, according to data by S&P Global Platts Analytics. Production is up about 400 MMcf/d in West Canada as a whole since late last week, which Platts estimates equates to about 300 MMcf/d of incremental production on NGTL.

This could mean more NGTL congestion and weaker AECO pricing this summer than both Platts Analytics and the market were expecting. Production in Western Canada typically slows from June through September timeframe, due to the effects of the spring break up as melting snow and muddy roads create poor drilling conditions.

When NGTL's East Gast reaches full capacity, it leads to production shut ins in to balance the system, assuming demand, West Gate outflows and other NGTL fundamentals are in line with Platts Analytics' expectations. Now, instead of a few days at the end of July and a couple of weeks in August looking to be at risk of production shut ins, the risk is now expanded for most of July, August and September. In October, regional demand picks up and absorbs production that would need to flow through the East Gate.

When production needs to be shut in, NGTL facilitates this by cutting takeaway and injection capacity at the East Gate, which drives AECO lower and then producers decide who shuts in based on economics. Not only are there more days of potential production shut ins, but the amount of production that needs to be shut would drive even sharper and stronger AECO weakness, according to Platts Analytics.

It should be noted that NGTL implemented a new program this summer that allows shippers to transfer some of their East Gate capacity to storage fields further upstream on the NGTL system. This could allow stronger injections to absorb excess supply and soften the blow to AECO.

The AECO balance of summer 2021 strip took a sharp dive as soon as production shot up. The balance of summer fell from a 40 cent/MMBtu discount to Chicago during the first half of June to a 55 cent/MMBtu discount as of June 18. This is likely due to market concerns of constraint-driven weakness. If production remains strong, expect this weakness to remain. If the production boom is short term the balance-of-summer strip should retighten.

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